Understanding the Biases in Analyst Forecasts

47 Pages Posted: 19 Aug 2006

Date Written: May 5, 2006

Abstract

Researchers have examined the relation between expected growth and analyst forecast bias and found mixed evidence, in that forecast bias differs significantly between high-growth and low-growth firms when the P/B ratio is used to measure expected growth, but not when the P/E ratio is used in this capacity. In this paper, I use P/B and P/E ratios jointly to more precisely investigate the relation of expected growth with forecast errors. I observe that the relation between P/E and forecast errors depends on the P/B level, explaining the low overall relation between P/E and forecast errors found in previous studies.

Keywords: price-to-book ratio, price-to-earnings ratio, analyst forecasts

JEL Classification: G29, G12, M41

Suggested Citation

Dowdell, Thomas D., Understanding the Biases in Analyst Forecasts (May 5, 2006). Available at SSRN: https://ssrn.com/abstract=925028 or http://dx.doi.org/10.2139/ssrn.925028

Thomas D. Dowdell (Contact Author)

North Dakota State University ( email )

Department of Accounting & Information Systems
Minard Hall
Fargo, ND 58105
United States

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